by Jack McCabe
ALL YEAR, TALKING HEADS ON BUSINESS news channels, bankers and corporate CEOs have been wondering when the Federal Reserve would raise the borrowing rate. A rate increase―the first in nine years―was expected in September as economists pointed to a national unemployment rate of 5.1 percent, lower than projected inflation, and the too-long extension of the zero interest borrowing rate as evidence that the economy is ready.
But at press time, Fed voting members were concerned that our economy, despite showing slow and steady growth, is still experiencing lackluster consumer demand and is heavily dependent on a zero percent interest rate and government infusion of capital to continue growth. The changing scenario in global economics also is weighing heavily on their decision.
Historically, the U.S. economy is very cyclical, and has slipped into a recession every seven to 10 years. It’s now been more than six years since the start of the Great Recession.
Here’s my take on how the spider web of the global economy will impact the nation, Florida and the Sarasota-Manatee market.
Last decade, artificially inflated U.S. real estate values and egregious greed from all parties caused the recession to spread via global economics into the first worldwide recession.
This decade, the dominoes will fall first around the world and strangle the U.S. economy last. Greek debt was all the news earlier this year, but it’s a pittance compared to other countries’ outrageous debt payment deadlines in the next two years.
The Chinese economy has been artificially hyped up with wealth reported at twice the real value by communist-controlled data sources. China was forced to drop the value of the yuan and the country’s economy declined by 25 percent in September, but it’s only half of the necessary correction, and more sharp drops in value and production are on the horizon. Count on it.
The Russian ruble and Brazilian real have lost 40 percent of value in the last 18 months. In the near future, you’ll see Spain, Portugal, Italy, Ireland and others with much larger debts than Greece on the front pages.
Historically, the U.S. economy has slipped into recession every seven to 10 years.
The political and economic turmoil in many countries has driven flight capital into the U.S. Our monetary policy of printing seemingly endless amounts of money, coupled with buying bad debt to prop up real estate and other industries and zero percent interest rates, have driven what little growth we’ve had. Foreign investment, hedge funds and affluent investors have artificially stimulated real estate transactions and values in several large U.S. markets.
But here’s what’s ahead: Interest rates will begin a slow escalation before the end of the year, government subsidy of corporate America will cease and investments in Europe and other areas of the world will become more desirable than inflated U.S. yields that have reached their pinnacle and are already sliding.
A new global recession, future austerity-type measures of U.S. economic policies designed to reduce our disgraceful $18 trillion dollar debt, coupled with “quantitative easing” in Europe, China, Japan and others, will cause an exodus of the foreign investment capital. Then, the weakness, fragility and false sense of a solid U.S. economy will rear its ugly head.
In Florida, foreign and corporate investment in real estate has driven prices artificially high in many markets, contributing to tight inventories of homes and condos for sale and further exacerbating price increases. The buying demand from foreigners and hedge funds has slowed in recent months. If we enter a recession in the next couple of years, inventories will substantially increase at a time of lessening demand, causing a reduction in prices.
This will also mean less spendable income for consumers and a decline in income for business owners.
Sarasota-Manatee real estate market values, in my opinion, will not escape the negative results of the next recession, but will survive and persevere better than most Florida areas.
It’s also my opinion Florida’s most positive economic driver will continue to be the migration of the baby boom generation, some 75 to 80 million in the United States and countless millions more internationally, and will lessen the local severity of the coming recession.
The Sarasota-Manatee market in particular now has a worldwide reputation for the beautiful beaches, arts and culture, fishing and other recreational opportunities, and close proximity to Tampa and an international airport.
As the next recession draws nearer, Sarasota and Manatee’s current (and future) full- and part-time residents and business owners will encounter a declining market, but a downturn that is shorter and less problematic than other areas in Florida and America. It could very well be the one bright spot in Florida over the next five to seven years. ■
Jack McCabe is chief executive of McCabe Research & Consulting LLC in Deerfield Beach and a founding member of the Carnegie Group think tank. He is an independent economist, housing analyst and consultant, author and speaker.